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Home My WebLink AboutContinued to a Date Uncertain - Pension Obligation Bond Anal CNITI(/ )&-b t D A ' City of Huntington Beach File #: 20-1493 MEETING DATE: 3/16/2020 Pension Obligation Bond Analysis and Proposed Fiscal Control Policies City of Huntington Beach Page 1 of 1 Printed on 3/11/2020 powered tq LegistarTM 1 1 PensionIo-it�- - Obligation Bond Analysis and Proposed Fiscal „ Control Policies Presented by March 16,2020 the Finance Department Background October 21, 2019— Study Session 'An Existentiol Threat— Pension Cost Increases" October 30, 2019—CalPERS UAL Refinancing Update Presentation to Finance Commission November 18, 2019—City Council Resolution 2019-89 adopted authorizing staff and bond counsel to submit the necessary documents to start the judicial validation process February 26, 2020— Finance Commission approval of UAL Policy t , • 1 1 UAL Cost Increase Impact on HB In the past 10 years (from 2009-2019), our annual UAL payment has increased a staggering 444%, from $4.58 million to $24.93 million Costs will continue to increase until 2031, reaching an annual UAL payment of$46.02 million, an increase of 85%from FY 2018/19 Pension Obligation Bonds provide the City with the ability to "refinance" its existing UAL Historically low interest rates provide a unique opportunity to refinance the City's existing UAL debt load,which is being assessed an interest rate charge of 7% We've coordinated our analysis assuming that we can refinance our UAL debt load at —3.41%,which would provide total savings of over$184.73 million over the life of the issuance Pension Obligation Bond Savings $46.02M- Estimated Savings $184.73 Million FY 30/31 represents peak of annual payment—521.09 million oi increase from FY 18/19 1 1 Use of POBs Increasing The use of POBs is increasing given that current interest rate levels have made responsible refinancing structures possible California agencies are currently considering$2.91 billion in POBs Significant POB refinancing that have occurred/ are planned in 2020 include: ► Riverside County- $700.O1VI 0. Orange County- $463.9M ► Riverside City- $632.OM ► Huntington Beach- $436.2M ► Ontario- $340.4M ► Inglewood- $300.01VI ► City of Orange- $280.01VI ► West Covina- $157.91VI ► Simi Valley- $1SS.0M ► Pasadena- $131.81VI Savings from Refinancing UAL Debt Should Be Conservatively Managed If we move forward with refinancing our existing UAL debt, staff would recommend that any realized savings be conservatively managed To that end, staff has been developing fiscal control policies for City Council consideration that we would coordinate in concert with the POB consideration process The policies we've identified and are working to finalize include: UAL Funding Policy General Fund Reserve Policy New Staffing Cost Projection Policy Park Playground Equipment Reserve Funding 1 1 Fiscal Policies Being Developed ► Each of the four financial policies is being developed so that they could only be modified/undone by a 6/711,vote of the City Council ► Details related to each policy includes: ► UAL Funding Policy ► Requires that 100%of the first year savings(-$5M,with annual increases based on CPI)be set aside into a restricted fund for the duration of the POB ► The funding could only be used to pay down any new future UAL pension debt ► General Fund Reserve Policy ► This policy would require an annual allocation of"$1M into our General Fund Reserve until we have a General Fund reserve equal to 50%of our annual GF Operating Budget ► New Staffing Cost Projection Policy R To constraint future staffing costs,this policy would require that any new staff be costed out at 1.5x the fully burdened rate of the proposed new staff member,with the additional cost being placed into the restricted UAL reserve account Park Playground Equipment Reserve Funding ► This policy would require that 15%of any General Fund reserves realized at the end of each fiscal year be placed in a restricted fund that could only be used to replace/upgrade park playground equipment Pension Obligation Bond Refinancing Savings and Analysis KNN Public Finance serves as the City's Independent Registered Municipal Advisor ("IRMA") The SEC approved the Municipal Advisor Rule regarding IRMAs in 2013 as part of the financial regulatory reform under the Dodd-Frank Act IRMAs have a fiduciary duty to the agency they represent, and have to serve as a safeguard against advice and transactions that are not in the agency's best interest IRMAs that do not serve as an appropriate safeguard have their license revoked by the SEC Pension Obligation Bond Refinancing Savings and Analysis (cont.) 1 Year Historicallndicies Pension Obligation Bond Refinancing Savings and Analysis (cont.) 10 Year Historical Indicies 9 1 1 Resurgence of Pension obligation Bond Issuances Pension Reform and actuarial assumptions have increased pension costs in the near-term Current scheduled annual UAL payments have negative amortization Interest rate on UAL amortization is currently 7.00% Until recently, a prepayment of the UAL did not result in a reduction of the annual amortization payment, but rather a shortening of the period Interest rates are at historic lows POB proceeds go directly into the large CaIPERS pool and are NOT invested into a side fund specific to the prepayment Upcoming Actions March 25, 2020 — Present the proposed fiscal control policies to Finance Commission for consideration April 6, 2020 — Present Preliminary Official Statement and other bond financing documents to City Council for approval to move forward with issuance of the POBs The UAL Policy and other Fiscal Policies would also be presented for Council approval at this time If approved, we are tentatively scheduled to being looking at POB issuance in mid-late May 2020, depending on market conditions 3/16/2020 Questions 7 Switzer, Donna From: Fikes, Cathy Sent: Thursday, March 12, 2020 9:44 AM To: Agenda Alerts Subject: FW: More on Pension Obligation Bonds . . . From: Gino J. Bruno <gbruno@socal.rr.com> Sent: Wednesday, March 11, 2020 9:32 PM To: Semeta, Lyn <Lyn.Semeta@surfcity-hb.org> Cc: Fikes, Cathy<CFikes@surfcity-hb.org> Subject: More on Pension Obligation Bonds . . . Dear Lyn . . . Before the Study Session on Pension Obligation Bonds this Monday (March 16th) I would hope you at least read the following. Yes, some were published a few years ago, but consider and analyze the principles involved. Those principles have not changed. https://www.vcstar.com/story/opinion/editorials/2020/01/04/simi-valley-pension-obligation-bonds-risky- maneuver-without-public-vote/2797589001/ https://www.governing.com/topics/finance/gov-pension-obligation-bonds-risky-or-smart.html https://www.forbes.com/sites/investor/2016/01/05/beware-of-pension-obligation-bonds/#26fbc48cl bdl https://reason.org/commentary/pension-obligation-bonds-are-a-risky-response-to-rising-calpers-bills/ https://reason.org/commentary/governments-issuing-pension-obligation-bonds-risk-worsening-not-improving their-financial-shape/ https://cei.org/blog/pension-obligation-bonds-no-panacea-state-budget-liabilities Thank you. Gino J. Bruno Huntington Beach SUPPLEMENTAL COMMUNICATION Meeting 3111a/.20 Agenda foam No.. S- W/ �-2 0- 114 9�) i Esparza, Patty From: Fikes, Cathy Sent: Monday, March 16, 2020 3:39 PM To: Agenda Alerts Subject: FW: Tonight's meeting From: Kathy Carrick<carrick92647@hotmail.com> Sent: Monday, March 16, 2020 3:11 PM To: CITY COUNCIL<city.council@surfcity-hb.org> Subject: Tonight's meeting The nation is in the midst of an unprecedented national emergency that is consuming everyone's attention. With this being the case, could you please consider taking some kind of action so that residents will have an opportunity to thoroughly participate before you vote on the POB issue? This issue is way too important to quickly take action while everyone's attention is, understandably, diverted to a larger issue. Thank you. Kathy Carrick Huntingyon Beach resident Sent from my Verizon, Samsung Galaxy smartphone SUPPLEMENTAL COMMUNICATION Meeting Date: Agenda them Mo.: !Ll�3) i